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Bridge loans


Dear Dr. Don,
We are buying a home and are scheduled to close in three weeks. Our current home is paid for and is under contract, contingent on the buyers selling their home. My problem is: If they do not sell before I have to go to settlement, what type of loan can I get? A bridge loan sounds a bit risky. Thank you. -- Joanne Jumpy

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Dear Joanne,
If you need the proceeds from the sale of your current home to purchase your new home, then a bridge loan is a lot less risky than not being able to close on the new home. Depending on how the real estate contract is written, and the laws of your state, you could forfeit your deposit and may be subject to additional expenses by delaying the closing on your new home.

A bridge loan is meant to be a short-term loan, usually with a loan term of six months with an option to renew for another six months. It is an interest-only loan, so you don't have to repay principal until you pay off the loan. With good credit, the interest rate on a bridge loan should be competitive with a home equity line of credit, which is your other alternative. The application fees and closing costs on bridge loans increase their effective interest rate.

A HELOC is a variable-rate loan, often priced at a premium to the prime lending rate. You can track the prime rate and other interest rates on Bankrate. These loans usually mature in 10 to 20 years, but the minimum payment on a HELOC is based on the interest expense, just like a bridge loan. HELOCs may have a prepayment penalty. Closing costs on a HELOC are lower than for a first mortgage but, since you don't currently have a first mortgage on your home, the closing costs on your HELOC may be higher.

Talk to your mortgage lender or your banker about arranging a bridge loan to tide you over until your current home closes. Your problem points out the importance of making contingent offers when you need to either sell your home or find financing before closing.

-- Posted: June 21, 2002




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